Market Sentiment Alert: Record Bearish Sentiment

Are you worried about the stock market falling? You are not alone. Bearish sentiment at historic highs in this week’s Fastest 4 Minutes in Finance.

Stock Market Downturn: S&P, Dow, and NASDAQ Performance 

It’s been a rough couple of weeks in the stock market, as investors are worried about the effects of President Trump’s tariff plan, economic data suggesting the economy is slowing down, and the cooling of exuberance over Artificial Intelligence.

At the time of this recording, the S&P is down 3% over the past week and is now negative year-to-date. The Dow Jones has dropped 1.8% in the past week, and is slightly positive year-to-date.

The tech heavy NASDAQ has plummeted more than 4% in the past week and is down more than 5% since January 1st.

Investor Sentiment Data: Bullish vs Bearish Readings

Weekly sentiment survey data from the American Association of Individual Investors released late last week revealed that investors are really sour on the stock market. The percentage of individual investors who are bullish about short-term market expectations is 19.6%. 60.6% of investors surveyed were bearish. That’s the highest bearish reading since September, 2022, and is the third highest reading in the past 10 years.

LPL Research tracks all this for us, and they pay particular attention to the spread between bullish and bearish sentiment. Last week, it was -41.2%. And that is pretty significant.

Take a look at this chart. 

You can see that the gap between bearish and bullish investors doesn’t get this wide very often. And has plummeted just since January.

Tariff Impact: Economic Headwind

So, what’s changed? There hasn’t been significant change in the inflation rate, unemployment rate, or interest rates. I think this comes down to Trump’s tariff talk becoming a tariff reality. There is real worry over the tariff impact on the economy. That is a specific headwind.

Contrarian Indicator: Historical Returns After Extreme Sentiment

But, the reality is when investors get this negative about the stock market, it’s actually good news historically. Take a look at this chart. \

On the far left, you will see that when the bull-bear spread is -31 or worse, which occurs only 4.1% of the time, the 3-month, 6-month, and 1 year returns of the S&P 500 Index has been positive. In fact, LPL tells us the average returns of all three time periods are higher than the overall average of the Index.

I can’t help looking to the other side of the chart. There, you will find that the reverse is true. When the bull-bear spread is widest in favor of bullish sentiment, the Index returns are slightly positive over the next 3 months, but negative, on average 6-months and 1-year later.

Investment Strategy: Long-Term Planning vs Emotional Decisions

The bottom line is that what we think will happen, rarely does, in the short term, when it comes to the stock market. It’s another caution to all of us, not to sell on fear, or buy on exuberance, but continue to have a long-term investment strategy that includes a consistent contribution rate in your pre-retirement years, with more and more diversification as you reach financial independence.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance. Independent Advisor Alliance and GenWealth Financial Advisors are separate entities from LPL Financial.